US trailer market

The US trailer market has recently experienced a record-breaking surge of orders that saw economists predict the best market performance since the late 1990s. The flood began with over 32,000 orders in September 2014, marking the seventh highest order month in history. It continued with October’s record 46,000, followed by 39,000 in November – the third highest result ever – and 45,000 in December, the second highest on record. This record-shattering Q4 resulted in an astounding 360,000 orders for all of 2014, easily besting the previous record year. But there is a dent in the growth curve now, with orders dropping in the vicinity of 20 per cent during 2015 Q1 – prompting industry to ask whether the market is overheating again or just correcting itself.

To understand the extremely dynamic environment that is the US trailer market, it is necessary to examine what set the stage for this unusual order activity. After all, the surge is more than just the result of favourable economic conditions – it is the consequence of a whole range of historic developments, with the Great Recession undoubtedly leading the way.

It is called the Great Recession in the United States because it was so severe that its impact is still palpable today – almost a decade after the credit crunch. GDP was -8.2 per cent in 2008 Q4, followed by -5.4 per cent in 2009 Q1. The freight markets were devastated so badly that it will take nine years (expected sometime in 2015) for freight loadings to exceed the peak levels of 2006. In 2009, they fell a staggering 20 per cent below the 2006 volume.

This, in turn, ravaged the commercial trailer market. Fleets were caught with way too many trailers for the scarcity of freight, and trailer OEMs were stuck with excessively high inventories. The industry went from a cycle-high of 280,000 trailers produced in 2006 to a low of 76,000 in 2009, an unprecedented 73 per cent drop. Historically, perhaps only the housing market suffered a bigger plunge than the commercial trailer market in the US. In response, thousands of industry workers – both on the OEM and supplier side – lost their jobs, and some plants were closed. There were a tremendous number of fleet bankruptcies also.

What followed was a long, excruciatingly slow economic recovery, which officially began in mid-2009 with the end of the recession. However, many would claim that it did not feel like a recovery then, but more like the bleeding had stopped. There was little indication that actual healing was taking place. A case in point is that even today, six years later, there are sectors of the economy, such as “real unemployment” and housing starts, which have yet to recover. Wages still lag behind for many workers also.

One reason may be that recessions that involve damage to the financial system tend to take longer to resolve. Japan is known for its Lost Decade, and this can be compared to the nine years of freight market recovery mentioned before. Freight has grown at a steady three to five per cent a year during the recovery period (2010-2015) but, like many sectors damaged in the recession, from a very low base (2009 bottom).

For the trailer manufacturing industry, the ‘lost half-decade’ may have only just ended. At the low point, the high amount of fleet bankruptcies flooded the market with late-model trailers; but as fleets had plenty of capacity to handle the still depressed freight demand, there was no real demand for them. With so much near-new equipment side-lined, trailer production was a paltry 115,000 in 2010. Demand increased steadily from there on – eventually making it over replacement demand levels again – but still not growing significantly.

During this period, the ‘freight generating’ sector of the economy outperformed the service sector. Normally, coming out of a ‘classic’ recession, the opposite is true. Yet while economists expected this to be a short-term anomaly, it is still true today. Therefore freight continues to grow faster than the economy as a whole, at least in the US.

Another important aspect of the Great Recession is that businesses, especially small ones, are much more risk-adverse than previously. Companies witnessed neighbouring businesses or competitors savagely destroyed by the economic downturn and did not want to become a casualty if things turned negative again.

The financial markets and the economy showed continued unsteadiness, so this attitude was considered highly rational. Yet the new paradigm also meant that businesses managed inventory more conservatively, borrowed less money and expanded very cautiously. The banks also raised their lending standards, making it more difficult for firms to get money for new equipment or structures.

On top of that, economic growth was also hindered by large Government ‘stimulus’ projects, which failed to significantly grow the economy. In addition, the Government suffered large losses of tax revenues, which greatly reduced infrastructure and equipment purchases. 

Taking all that into account, 2014 proved to be somewhat of a transition year, where several factors worked together to impact the US trailer market. Freight grew for the sixth straight year and at a healthy four per cent clip. This growth enabled freight to reach higher levels not experienced in years. However, freight hauling capacity had been greatly reduced by the recession and then added back slowly and cautiously due to the new risk-averse environment. In addition, new Hours-Of-Service regulations were enacted that reduced truck productivity by around two per cent.

This resulted in trailer utilisation percentages topping 95 per cent and then staying higher than the 90 per cent historical average (see chart). Trucking capacity was extremely tight, and this was further aggregated by a very harsh winter. Freight rates, especially spot rates, jumped. Suddenly fleets found themselves with excess money to spend, a shortage of equipment and a steady supply of freight.

With everyone realising they needed more trucks and trailers at about the same time, the pack mentality started to kick in. The big fleets ordered first due to their long-term planning ability, but the rest of the market jumped right in. Unsurprisingly, this deluge of orders caused disruption in the supply chain: Trailer OEMs had balanced capacity and were very adept at running efficiently at the demand requirements of the past few years; and component suppliers had ‘right-sized’ and were set up to manage a slow-growth market. Now, however, OEMs struggled to quickly add capacity, and some suppliers that had closed and sold off plants during the Great Recession started constructing new ones.

Trailer salespeople exploited this situation by encouraging fleets to place orders for delivery in nine months or later to reserve limited build slots at the OEMs – resulting in the large fleets placing another round of big orders to complete their expected requirements for 2015. As build slots became scarcer, medium and small-sized fleets followed the big fleets’ lead. This factor contributed greatly to the record order avalanche at the end of 2014.

The reason why it all came so unexpectedly is, again, historic in nature. In a normal economic recovery, 2010 would have been a high-growth, snapback year, and trailer production would have returned to a healthy level, at least near replacement level (200,000-225,000). But the recession caused such turmoil and economic growth was so choppy and tenuous that the 2010 build was an anaemic 115,000. Combine this with the risk-adverse fear prevalent in modern-day North America, and fleets began to run trailers much longer than normal before replacement. Repairing old trailers held less risk than investing in new ones.

In previous recessions, the flatbed segment was very prone to extended trade cycles in weaker economic times. After the Great Recession, all trailer segments, except for tankers, experienced increases in population age. This caused significant pent-up demand to build up from 2010 to 2013, and this pent-up demand began to be released in 2014. It has poured out in 2015, but with corrective market action now taking place.

The most commonly asked question today is whether or not 2015 production will break the record 302,000 of 1999 or not, with research company FTR expecting it to fall just short with around 295,000. Why? Many experts believe that orders have now peaked, so production should follow suit later this year.  Backlog already topped out in January, and April saw a substantial 22 per cent order drop following weak Q1 data.

With the housing market still subdued – the big driver of truck freight in the last upcycle – and business inventories too high for the current environment, the market may have just corrected itself and will find its new sweet spot sometime in 2015.

Despite record 2014 order volumes, OEMs are therefore not off the hook just yet. Although many of them are booked solid until the end of the year, a significant number of those orders were placed nine months in advance and can still be cancelled if not needed. But unless there is a major shock to the US economy, it should finish the year strong. And even if there are some late cancellations, the downturn in this cycle is not expected to be as catastrophic as last time.

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